SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Thirteen Weeks Ended August 31, 1995
Commission File Number 0-8796
SPECTRUM CONTROL, INC.
Exact name of registrant as specified in its charter
Pennsylvania 25-1196447
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6000 West Ridge Road, Erie, Pennsylvania 16506
(Address) (Zip Code)
Registrant's telephone number, including area code (814) 835-4000
Not Applicable
Former name, former address and former fiscal year, if changed
since last report
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered
by this report.
Class Number of Shares Outstanding
Common, no par value 10,607,615
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Consolidated Condensed Balance Sheets --
August 31, 1995 and November 30, 1994 3-4
Consolidated Condensed Statements of
Income - Thirteen Weeks Ended
and Thirty-Nine Weeks Ended
August 31, 1995 and 1994 5-6
Consolidated Condensed Statements of
Cash Flows - Thirty-Nine Weeks Ended
August 31, 1995 and 1994 7
Notes to Consolidated Condensed Financial
Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-12
PART II OTHER INFORMATION 12
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(Thousands of Dollars)
<CAPTION> August 31, 1995 November 30,1994
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 79 $ 102
Accounts receivable, net of
allowances 8,348 7,717
Inventories
Finished goods 1,578 1,756
Work-in-process 6,238 6,321
Raw materials 3,661 3,318
Total inventories 11,477 11,395
Prepaid expenses and other
current assets 196 274
Total current assets 20,100 19,488
PROPERTY, PLANT AND EQUIPMENT,
at cost less accumulated
depreciation of $20,815
in 1995 and $19,005 in 1994 16,350 15,932
OTHER ASSETS
Intangible assets 1,359 1,708
Deferred income taxes 381 846
Deferred charges 85 121
Total other assets 1,825 2,675
TOTAL ASSETS $ 38,275 $ 38,095
The accompanying notes are an integral part of the financial
statements.
</TABLE>
<TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<CAPTION> (Thousands of Dollars)
August 31, 1995 November 30, 1994
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 2,720 $ 4,096
Accounts payable 3,123 2,057
Accrued salaries and wages 1,114 1,047
Accrued interest 101 133
Accrued federal and state
income taxes 78 52
Accrued other expenses 1,063 774
Current portion of long-term debt 2,274 3,078
Total current liabilities 10,473 11,237
LONG-TERM DEBT 7,001 8,275
STOCKHOLDERS' EQUITY
Common stock 13,412 13,350
Retained earnings 7,559 5,488
Foreign currency translation
adjustment (170) (255)
Total stockholders' equity 20,801 18,583
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 38,275 $ 38,095
The accompanying notes are an integral part of the financial
statements.
</TABLE>
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(Thousands of Dollars Except Per Share Data)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
Aug 31,1995 Aug 31,1994 Aug 31,1995 Aug 31,1994
Net sales $ 12,470 $ 10,226 $ 35,860 $ 32,219
Cost of products sold 8,346 7,478 24,487 23,061
Selling, general and
administrative expense 2,741 1,963 7,829 6,651
11,087 9,441 32,316 29,712
Income from operations 1,383 785 3,544 2,507
Other income (expense)
Interest expense (210) (267) (725) (754)
Other income - 199 - 428
(210) (68) (725) (326)
Income before provision
for income taxes and
cumulative effect of
a change in accounting
principle 1,173 717 2,819 2,181
Provision for income
taxes 311 221 748 675
Income before cumulative
effect of a change
in accounting
principle 862 496 2,071 1,506
Cumulative effect on
prior years of
changing the method
of accounting for
income taxes - - - 1,845
Net income $ 862 $ 496 $ 2,071 $ 3,351
Earnings per common
share
Income before
cumulative effect
of accounting
change $ 0.08 $ 0.05 $ 0.20 $ 0.14
Cumulative effect
of accounting
change - - - 0.18
Net income $ 0.08 $ 0.05 $ 0.20 $ 0.32
Dividends declared
per common share - - - -
Weighted average
number of
common shares
outstanding 10,585,853 10,548,540 10,563,532 10,418,854
The accompanying notes are an integral part of the financial
statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Thousands of Dollars)
Thirty-Nine Weeks Ended August 31,
1995 1994
NET CASH PROVIDED BY $ 5,513 $ 2,411
OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sales of
property, plant and
equipment - 1,078
Purchase of property,
plant and equipment (1,964) (1,208)
Increase in other assets - (998)
Net cash used in
investing activities (1,964) (1,128)
CASH FLOWS FROM FINANCING
ACTIVITIES
Net proceeds (repayment)
of short-term debt (1,385) 240
Repayment of long-term debt (2,252) (1,925)
Net proceeds from issuance
of common stock 62 351
Net cash used in
financing activities (3,575) (1,334)
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 3 -
NET DECREASE IN CASH
AND CASH EQUIVALENTS (23) (51)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 102 293
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 79 $ 242
CASH PAID DURING THE PERIOD
Interest $ 757 $ 678
Income taxes 205 388
The accompanying notes are an integral part of the financial
statements.
SPECTRUM CONTROL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
AUGUST 31, 1995
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and
Article 10 of Regulations S-X. Accordingly, they do not
include all of the information and notes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying
financial statements include all adjustments which are normal,
recurring and necessary to present fairly the results for the
interim periods. Operating results for interim periods are
not necessarily indicative of the results that may be expected
for the year. For further information, refer to the
consolidated financial statements and notes thereto included
in the Spectrum Control, Inc. and Subsidiaries annual report
on Form 10-K for the fiscal year ended November 30, 1994.
Note 1 - Principles of Consolidation
The consolidated condensed financial statements include the
accounts of Spectrum Control, Inc. and its subsidiaries
(the Company), all of which are wholly-owned, except for
Spectrum Polytronics, Inc. which is 96% owned. To facilitate
timely reporting, the fiscal quarters of a foreign subsidiary
are based upon a fiscal year which ends October 31. All
significant intercompany accounts are eliminated upon
consolidation.
Note 2 - Foreign Currency Translation
The assets and liabilities of the foreign subsidiary are
translated into U.S. dollars at current exchange rates.
Revenue and expense accounts of these operations are translated
at average exchange rates prevailing during the period. These
translation adjustments are accumulated in a separate component
of stockholders' equity. Foreign currency transaction gains
and losses are included in determining net income for the period
in which the exchange rate changes.
Note 3 - Earnings Per Common Share
Earnings per common share is computed based on the weighted
average number of shares of common stock outstanding during the
period of computation. Although the Company has issued
potentially dilutive common stock equivalents in the form of
stock options and warrants, the dilutive effect of these
securities in the aggregate is less than three percent of
earnings per common share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Third Quarter 1995 Versus Third Quarter 1994
Results of Operations
Net sales increased 22% during the period, with consolidated net
sales of $12.5 million in 1995 and $10.2 million in 1994. The
increase in sales of approximately $2.3 million primarily
reflects additional shipment volume of electromagnetic
interference ("EMI") filtered connectors and EMI filter plates
used by customers in the telecommunication industry.
Gross margin was $4.1 million or 33% of sales in 1995, compared
to $2.7 million or 27% of sales in 1994. The increase in gross
margin principally reflects changes in sales mix and reduced
production costs at the Company's ceramic manufacturing operation
in New Orleans, Louisiana.
Selling, general and administrative expense increased during the
period. In the third quarter of 1995, selling, general and
administrative expense was $2.7 million or 22% of sales, compared
to $2.0 million or 19% of sales for the same period last year.
In 1994, the Company delayed or postponed certain discretionary
expenses. Accordingly, although the Company is continuing its
efforts to reduce operating costs, the reduction in 1994 selling,
general and administrative expense is not expected to be
sustained in 1995.
As a result of reduced bank indebtedness, the Company's interest
expense decreased by $57,000 during the period, from $267,000 in
the third quarter of 1994 to $210,000 in the third quarter of 1995.
In August of 1994, the Company's majority-owned subsidiary,
Spectrum Polytronics, Inc., sold certain land and building,
realizing a gain of $143,000. This gain was included in other
income for the third quarter ended August 31, 1994.
Thirty-Nine Weeks 1995 Versus Thirty-Nine Weeks 1994
Results of Operations
Consolidated 1995 net sales increased by $3.6 million or 11%
from the comparable period of 1994. During the first thirty-nine
weeks of 1995, increased shipments to customers in the
telecommunication industry more than offset reduced shipment
volume to customers acting as prime suppliers to the military
and aerospace industries. Overall, average selling prices
remained relatively stable throughout the period.
During the first thirty-nine weeks of 1995, gross margin was
$11.4 million or 32% of sales, compared to $9.2 million or 29%
of sales in the same period of 1994. In 1994, gross margin
was negatively impacted by increased ceramic capacitor
manufacturing costs. These ceramic capacitor production
problems were substantially corrected during the fourth
quarter of 1994. In addition, 1995 gross margin was
positively impacted by changes in sales mix and economies
of scale realized with additional shipment volume.
Selling, general and administrative expense increased by
$1.2 million in 1995 and was 22% of net sales compared to 21%
in 1994. As a percentage of sales, selling expense remained
relatively constant throughout the period. General and
administrative expense, however, increased by $473,000 in 1995.
As previously discussed, certain discretionary expenses were
delayed or postponed in 1994. Accordingly, Management
believes that the current period selling, general and
administrative expenses are more indicative of future expected
operating costs.
Interest expense decreased $29,000 in 1995, from $754,000 in
1994 to $725,000 in 1995. The decrease in interest expense
reflects reduced bank indebtedness, which was partially offset
by higher short-term interest rates. During the first
thirty-nine weeks of 1995, average short-term interest rates
were approximately 9% compared to 7% during the same period of
1994.
During the first thirty-nine weeks of 1994, the Company
generated $428,000 of other income, principally consisting of
patent licensing fees and a gain from the sale of certain land
and building.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -
(CONTINUED)
The Company's effective income tax rate was approximately 27%
for the first thirty-nine weeks of 1995, compared to 31% for
the comparable period of 1994. The decline in the 1995
effective tax rate primarily reflects decreases in the valuation
allowance for deferred tax assets relating to certain foreign
and state net operating loss carryforwards.
Effective December 1, 1993, the Company adopted Statement of
Financial Accounting Standards No.109. "Accounting for Income
Taxes" ("SFAS No. 109"). The cumulative effect, through
November 30, 1993, of adopting the new method of accounting
for income taxes amounted to approximately $1.8 million
or $0.18 per share. As permitted by SFAS No. 109, prior period
financial statements were not restated. Accordingly, the
cumulative effect of this change in accounting for income taxes
was included in net income in the Company's consolidated
statement of income for the first thirty-nine weeks of 1994.
Liquidity, Capital Resources and Financial Condition
The Company has a $6.0 million line of credit with PNC Bank
of Erie, Pennsylvania (the "Bank"). Under the terms of the
Line of Credit Agreement, borrowings and required repayments
are based upon an asset formula involving accounts receivable
and inventories. The revolving credit line is collateralized
by substantially all of the Company's tangible and intangible
property, with interest on all borrowings at rates
approximating the Bank's prevailing prime rate. At August 31,
1995, the Company had borrowed $2.6 million under this
financing arrangement, with an additional borrowing
availability of approximately $3.3 million under the asset
formula. The current Line of Credit Agreement expires on
April 30, 1997.
The Line of Credit Agreement contains certain negative
covenants. These negative covenants require the Company to
receive prior written approval from the Bank before the
Company permits any additional encumbrances on its assets,
guarantees or incurs any additional indebtedness, or merges
or consolidates with any entity. In addition, the Line of
Credit Agreement requires the Company to maintain certain
minimum levels of tangible net worth and operating cash flow.
At August 31, 1995, the Company was in compliance with all
of these financial covenants.
The Company's wholly-owned foreign subsidiary maintains
unsecured Deutsche Mark lines of credit with German financial
institutions aggregating $1.1 million (1.5 million DM). At
August 31, 1995, the Company had borrowed $119,000
(166,000 DM) against these lines of credit. Borrowings under
the lines of credit bear interest at rates approximating the
prevailing prime rate and are payable upon demand.
The Company's working capital and current ratio continued
to improve during the period. At August 31, 1995, the Company
had net working capital of $9.6 million compared to $8.3
million at November 30, 1994. Current assets were 1.92 times
current liabilities at August 31, 1995, compared to 1.73 at
November 30, 1994.
During the first thirty-nine weeks of 1995, net cash
provided by operations amounted to $5.5 million, an increase
of $3.1 million from the comparable period of 1994. In
addition to capital expenditures of $1.9 million, this
positive cash flow was utilized to repay $3.6 million of
indebtedness. As a result of this debt reduction and the
increase in stockholders' equity from earnings during the
period, the Company's debt to equity ratio also continued
to improve. Total liabilities to net worth were 0.84 at
August 31,1995 versus 1.05 at November 30, 1994.
The Company expects that cash generated from operations and
existing lines of credit will be sufficient to meet its
operating requirements throughout 1995, including scheduled
long-term debt repayment and planned capital expenditures.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -
(CONTINUED)
Impact of Inflation
In recent years, inflation has not had a significant impact
on the Company's operations. However, the Company continuously
monitors operating price increases, particularly in connection
with the supply of precious metals used in the Company's
manufacturing of ceramic capacitors. To the extent permitted
by competition, the Company passes increased costs on to its
customers by increasing sales prices over time. Sales increases
reported during the current period, however, have substantially
arisen from increased sales volume, not increases in selling
prices.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for
which this report if filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Spectrum Control, Inc.
(Registrant)
Date September 26, 1995 By /s/ John P. Freeman
John P. Freeman,
Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SPECTRUM CONTROL, INC. CONSOLIDATED CONDENSED BALANCE SHEET AT AUGUST 31,
1995, AND CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE NINE-MONTH
PERIOD ENDED AUGUST 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO ITS FORM 10-Q FOR THE THIRD QUARTER ENDED AUGUST 31, 1995.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> AUG-31-1995
<CASH> 79
<SECURITIES> 0
<RECEIVABLES> 8,348
<ALLOWANCES> 0
<INVENTORY> 11,477
<CURRENT-ASSETS> 20,100
<PP&E> 37,165
<DEPRECIATION> 20,815
<TOTAL-ASSETS> 38,275
<CURRENT-LIABILITIES> 10,473
<BONDS> 0
<COMMON> 13,412
0
0
<OTHER-SE> 7,389
<TOTAL-LIABILITY-AND-EQUITY> 38,275
<SALES> 35,860
<TOTAL-REVENUES> 35,860
<CGS> 24,487
<TOTAL-COSTS> 24,487
<OTHER-EXPENSES> 7,829
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 725
<INCOME-PRETAX> 2,819
<INCOME-TAX> 748
<INCOME-CONTINUING> 2,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,071
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
